Fundraising and the Entrepreneur

Today we talked about how to raise funds and the venture capital process. We were introduced to the three main stages of funding by Ms. Virginia, which can be classified as the ‘ideas’, ‘product’ and ‘company’ stage. At the ‘ideas’ stage, there is little that we can do except to borrow from others or seek help from angel investors or the government. At the product stage, we can begin to depend on revenue generated sales of our product or service as a source of funding. This is also known as organic growth. At the ‘company’ stage, we have a range of financing options available ranging from acquisitions to venture capital. Generally speaking, from an investor’s point of view, it is more advisable for to invest in product-based firms rather than service-based ones as they are have higher scalability, lower cost and a higher profit margin.

Next we also touched upon the venture capital process, where Ms. Virginia explained to us that opting for venture capital funds may not always be the best option. The goal of the entrepreneur is to build a successful business, while the goal of the venture capitalist is to maximize his or her financial returns, such as by selling it when it is the most profitable. Thus, both parties have to negotiate and mutually agree on the terms of funding such as board control, preferred class of shares, convertible loans, etc.

Last but not least, we also learnt some valuation basics. Valuation simply means ‘how many shares you give to other people for how much money they give you’. From the exercise given in the PowerPoint slide, the 1st round of pre-money and post-money valuations of Xcaliber Software Solution were calculated to be $3.84M and $7.84M respectively. For the 2ndd round, the post-money valuation was $39.2M, and the stakes of SMA and the international venture group were 10% and 18% respectively.

Knowing the above, we decided to do further research on our own. Here are some of the videos and articles we uncovered which explore this topic further in detail:
1. Successful Fund Raising-Kathy Eisenhardt, Ascherman Professor, Stanford University

2. Disadvantages of Venture capital-Mitch Kapor Founder of Foxmarks

3. Bootstrapping Heidi Roizen-Mobius Venture Capital